Pay off the house or save for retirement?

[Liberec]

If you have a personal homeloan (ignoring IP's for now) are you pumping every spare dollar into reducing that debt, or are you putting some of it into other investments (e.g. managed funds etc) as retrement savings?

I'm interested in what other forumites are doing and why.Personally, I'm working hard on my homeloan because the cost of that is higher than the benefit of most retirement schemes. However I recognise that starting early with some kind of retirement savings is good for building it up (the compound benefit), and I'm wary of having all my investments in property.

So, for those who have made a concious decision to pay off the home loan first, or are also working on some non-property investments at the same time, why have you decided to go down these paths?

[rueben]

I can't see me ever paying off my home loan. Until I have a huge portfolio/equity I cannot see the point in money sitting in a house doing nothing.

I always use the equity in my home to go and buy another property and use leverage to my benefit.

I dabble in the sharemarket but feel comfortable with most of my retirement portfolio in property. I look at others who are independently wealthy and almost without exception they invest heavily in property. As my Dad always said - "they aren't making anymore land". But, it helps that I love property - I don't love the sharemarket - so I'm going to just keep on doing what I enjoy.

I have invested in Managed funds before but don't like the fees I pay and would rather either make the mistakes, or otherwise, myself. I just don't like to relinquish control of my money to someone in a corporate office. I have a problem with managers still taking fees if the fund doesn't perform.

So what I guess I'm saying is that I don't aim to pay down my mortgage and I don't plan on putting alot of money into other types of investments.

[LondonKiwi]

Ditto, most of the managed funds run by "experts" have done their best to lose money for me rather than make me money!

I'd prefer to run my own retirement fund based on property that way I can trust the management to myself and use my money wisely.

LK

[drelly]

As someone that used to sell retirement plans, I have a problem with the question itself for some very practical reasons.

Firstly, in 12 years, I have *never* seen anyone who paid off their mortgage begin to contribute significant amounts of money into a retirement plan. Most get used to spending the extra cash pretty quickly.

Secondly, since the average age that the last mortgage is paid off in NZ is about 55, it's too late then anyway.

Managed funds for retirement planning are effective if they're committed to over a long time from as early as possible and never touched. Like that happens... hardly ever. Let's face it, most people don't want to and possibly aren't equipped to plan for their own retirement without these sorts of tools. Even then, the majority of my clients have sabotaged their own retirement plans by dipping into them for holidays, Xmas presents(!!), spa pools, boats and any number of other poor reasons. They phone me years later complaining about their poor performance. Most are stunned to hear how much they have drained them by.

I agree with others that the way funds are managed and fees structured could be improved but even if they were, clients would still bugger it up. What we need is a compulsory super plan that has tax incentives. We nearly had it but the ignorant masses voted against it in a public referendum years ago.

[NESW]

What we need is a compulsory super plan that has tax incentives. We nearly had it but the ignorant masses voted against it in a public referendum years ago.

So totally disagree... my Aussie employer compulsory industry managed one, whilst yelling they had achieved a 16.9% return for the fin year, actually managed to send my super' backwards because of a major loss in the month that I transferred my lump sum over to the fund. And they will not allow me to know (same with any super fund) what it is earning in "real time" so I can get it out and into another "approved" fund quickly.

Better to invest your own money your own way and not let any other &*&*&*&* lose it for you.

[LondonKiwi]

I had a great return from my fund about 3 years ago. My end of year "return" ended up being a loss of 80% of what I had contributed for that year. Now this wasn't '87 we are talking about here so it astounded me how these experts can get it so wrong.

Still I started this fund 15 years ago and have never dipped into it and don't intend to either. When it reaches fruition I will just see this as a bonus.

LK

[drelly]

For those that 'can' manage their own plans, that's great. But most can't. The stats prove that again and again. Most people retire with very little.

[NESW]

For those that 'can' manage their own plans, that's great. But most can't. The stats prove that again and again. Most people retire with very little.

Certainly, no argument there, but why should the masses suffer substantial losses on "safe" investments by those who know better and are major players in the investment community? It needs more legislation protecting the masses and their savings before making it law.

[Dean@Massiveaction]

IMHO that is a victim mentality NESW. If people don't want to take teh necessary steps to deicde what is good or bad for them then that is up to them. We blame the government for everything from poverty to leaky buildings. How about things like personal responsibility.

It would take 2 minutes for anyone to research enough to know that managed funds are in essence neither safe nor guaranteed. People need to get enough education and advice to make wise decisions, decisions which THEy should be held responsible for.

[drelly]

One of the big issues was that the retirement plan suggested wasn't "guaranteed" by the Govt. Why should it? On the one hand, the public didn't want the govt to manage the funds but on the other they wanted them to guarantee them? It doesn't make sense! We could have had individual, tax-cut funded, tax-free retirement plans.

Instead, National released the tax-cut to the public before the referendum, who immediately went out and used it to get the latest gadget on HP. stupid. stupid. stupid.

It was just a ploy to buy votes. If they were serious, the cuts would have gone directly into the retirement funds and there would have been no referendum.

[NESW]

IMHO that is a victim mentality NESW. If people don't want to take teh necessary steps to deicde what is good or bad for them then that is up to them. We blame the government for everything from poverty to leaky buildings. How about things like personal responsibility.

It would take 2 minutes for anyone to research enough to know that managed funds are in essence neither safe nor guaranteed. People need to get enough education and advice to make wise decisions, decisions which THEy should be held responsible for.

It is my personal belief if any Government in any Country wants to enforce a "retirement savings plan" by Law, then strict penalties against Fund Managements must be in place to ensure open accountability in "real time" to protect the masses from the "meaningless jargon and drival" which misleads and is used by such "approved" funds to control and manage the considerable wealth they have amassed, (not through their own investment knowledge and growth), but simply because its "law" that employers (in Aust for example which is where my super is) must contribute on employees behalf (currently min. 9%) of their gross income.

Certainly no government can be held accountable for lack of fund earnings, but it must give the employee an opportunity to have a greater say and access to up to date information to be able to make "real time" decisions in the first instance.

Let me give a very basic personal example. I can access, any time or day via internet banking, my property loan balances, when the next payment is due, and how much I am paying in interest to the bank etc. It is in "real time" (or at least close to real time poss 24 hour delay for o/night processing). The bank by law has to send me a notice/statement when the interest rates go up or down... I know exactly where they are at.


My employer superannuation account is also available to "view" via internet access any day or time of the week, however is not in "real time", only estimated what the current balance is. I get a mass mailed general glossy brochure once a year telling me the great amount they have "earned" for me and my account.

I have a choice with all of the "approved" employer superannuation funds whether I have my super accounts in "safe" investments (managed by the fund) which are primarily made up of bank account investments showing a very low return, or invested at the other end of the investment scale and placed in high risk investments, chasing the smell of a greater return. This is supposed to be my choice to make and manage.

However, when I received my personal statement showing a loss for said investment account which earned so called "great" returns, I cannot access what the current earnings are for any of these investment categories. At the time I choose to invest with said fund, the "promoted" earnings were high, without being risky. Nothing was said about it making a loss at that month.


I cannot access what last month's earnings were. I cannot access what they were earning 2 months ago, but I can access what the "official" figures were for three months ago. I had to telephone them to find out why my sum was affected badly, yet my husband's super amount, who's application was lost although was in the same envelope as mine to the fund, grew because his went in a month later...

So if I want to utilise the ability to transfer my "new" superannuation payments to another category, to chase a better return, or just escape a losing one, or even transfer the balance of my existing fund for the same reasons, I cannot make that decision based on actual current earnings.

To my way of thinking, if they don't know what those funds are earning this week, or are not prepared to publish them, they should not be investing, or given the power to invest, MY money that I am legally forced to hold in such Funds, instead of where I would rather it be (ie reducing the home loan).

That is where I think Governments who legislate for forced retirement savings plans, must be held accountable to ensure that laws are in place to make the funds accessible and accountable for the masses in real time so they are able to make the necessary informed decisions in the first place.

Does that make sense, its Sunday morning and I am in weekend mode....

[Keys]

To answer the origional question:

I have a personal housing loan. I have business housing loans. These are different beasts. One is tax deductable, the other is paid for out of post tax income. The personal housing loan is currently at 7.85%. This is the "nett" amount which is required to be paid. I need to earn 7.85% plus the tax I need to pay on this money to service this loan. IT MATTERS NOT where the loans are secured. It does matter what the purpose of the loan is for. I would always reduce personal housing loans. Think about it. Where else can you get *guarenteed* returns in excess (sometimes of 39%) of the loan interest rate? Whereas investment loans, being tax deductable, are not such a good return on your (repayment) money.

Therefore, I strongly suggest you pay down personal debt before investing in anything else.

Having said that. There are some investments (property) which lend themselves to high gearing and high returns. Do lots of research.

[tpr2]

Hi
A great post and obviously some differing opinions.

Many years ago I had a manager whose favorite answer to every question was "it all depends"

In this case there are so many right answers as you can see. The only person who can answer really for sure is youself because you are the one who really knows your self and your situation.

Paying off your mortgage is a very safe and rewarding investment, as one of the posters points out its the equivalent of earning 7 or 8 % tax free and with no risk.... there are not very many investments you can go into that have no risk.

Lets think about that again though.... every investment has risk....so what is the risk in paying off your mortgage?

Opportunity cost! but thats all....which is pretty cool really.

I would suggest that you sit down with a financial planner who has no interest in wether you buy property or shares or anything esle and work through your goals, your risk profile your financial postion etc and then decide whats best for you.

lol.... I can hear and see the posts already.... where do you find a financial planner who does not care what you invest in....lol

Someon who bills you for their advice rather than giving you free advice and expecting you to purchase the products they have to sell.

If you don't know of one then check out nzpis.com

cheers

Terry

[Green Fish]

The reality is that most average NZers who own their own home have invested everything in the NZ property market. So they're all 'Buy and Hold' property investors, whether they like it or not.

The obvious place for any spare money is in reduction of the mortgage loan. But if you have a good super plan, with employer contributions, then it might pay to just pay the interest on the mortgage. The professional to see is an actuary.

[tpr2]

Hi Greenfish

An actuary would be a great person to see. they have all the facts and figures, more than anyone would ever need (unless your an actuary) however how many do you know who provide their services to the public in general. The ones I know are working for insurance companies and fund managers. Although I must admit I have never bothered to look up the yellow pages for one....that could be an interesting exercise.

cheers

Terry
www.nzpis.com